Global Economic Crisis

In the wake of the disastrous existing home sales data for July, reported on in my previous blog comment, the Commerce Department released figures for U.S. new home sales for July. They have declined 12.4% from the prior month. More ominously, these figures, when compared with July 2009, reflect a contraction of nearly one third in new home sales. Remember, July of last year was already experiencing a dismal level of new home purchases.

The July new home sales in the United States came in at the poorest level since 1963, reflecting an annual rate of 276,000 sales. To put this number in context, in 1963 the American population was 190 million versus more than 300 million in 2010.

The combination of record contractions in existing and new home sales in the U.S. is indicative of a housing market that, far from recovering, is on the verge of the next phase of a deep collapse. The earlier collapse stemmed from subprime mortgages that defaulted, crippling the global financial system. The second phase is being driven by high unemployment, with no signs of an early turnaround. In this situation, one must be an obtuse optimist to believe that the banks and  investment houses will be immune from the impact of what is clearly an accelerating collapse in the residential real  estate market in the United States.

The American housing industry is once again in free fall. The latest figures, just released, indicate that in July existing home sales plunged by 27%, reflecting an annual pace of 3,830,000 home sales, according to the  National Association of Realtors. This is a fifteen year low, which had only been temporarily delayed by the Obama administration’s deficit-financed home purchase tax credit, now expired.

These figures are a disaster for the American economy of such a staggering level, not even Timothy Geithner or Ben Bernanke can put a positive spin on it. The housing industry is the center of gravity for the entire American economy, and its earlier demise was what unleashed the current global economic crisis. The gloomy data now out on existing home sales is another flashing red light, warning not only of a double-dip recession, but even more ominously, a prolonged economic depression.

If any further proof is needed that the U.S. economy is headed towards a double dip recession, the latest statistics from the Labor Department provide it. The most recent figures, just released, show that initial jobless claims have risen to 500,000. This is the third consecutive week of rising unemployment claims, and the worst numbers in nine months.

In March 2008, initial jobless claims rose to a peak of 651,000. By July 2010 they had dropped to 427,000. The green shoots corner over at the Federal Reserve and U.S. Treasury were celebrating the “success” of the Obama stimulus spending, and expected the figures on initial unemployment claims to soon drop below 400,000, a sign that the job market in America was recovering. Instead, however, this figure has soared to 500,000. The reason is simple. There has been no recovery or end to the economic crisis. All that has been accomplished is that Wall Street was bailed out, at the cost of transferring vast amounts of debt from the private to the public sector.

And what are the august politicians of Washington DC doing while the U.S. economy continues its implosion? Surely they must be working night and day trying to salvage the fast eroding American economy. Perhaps they would, if they had not found other fish to fry. For instead of addressing the nation’s profound economic crisis, they are obsessed over the proposed location of a new Islamic Center in Lower Manhattan  and whether or not it should be moved a few blocks, as well as the vital existential question of President Barack Obama’s religious identity (some on Capital Hill feel he is not really a Christian, and might actually be a secret Moslem).

It would appear that the American political establishment has gone deeply insane, and its collective madness will accomplish nothing constructive on behalf of the U.S. economy.

Japan’s economy is in very deep crisis. The latest figures, reflecting economic performance from the April-June period, reveal official growth at a mere 0.1 percent, according to Japan’s Cabinet Office. This is far worse than even the miserable 0.6 percent that had been forecasted by economists.

The Q2 figures show that Japan is effectively back in an L shaped recession, plagued by domestic price deflation, shrinking internal demand despite massive debt-financed stimulus spending by the government, coupled to an export-killing appreciation in the value of the yen. In sum total, the world’s 2nd or 3rd largest economy (depending on how much trust one has in official Chinese government GDP statistics) is in a terrible state. And that is without even factoring in the growing probability that Tokyo will face a severe sovereign fiscal crisis. That is no mere conjecture; Japan’s prime minister has already warned that his country could face a public debt catastrophe as severe as in Greece.

If Japan is in dire economic straits, it is clear that the global economic crisis  is far from ending.

In a step that will be one of the markers on the road to economic and financial catastrophe, the Federal Open Market Committee (otherwise known as the FOMC) of the Federal Reserve, made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy. In a policy being dubbed QE2, the Federal Reserve’s FOMC conceded that the so-called U.S. economic recovery has “slowed,” and required more stimulus from the Fed. However, with federal funds interest rates now effectively at zero, the only aspect of monetary policy left is money printing. Thus, the Federal Reserve, in effect, will use its printing press to buy long-term U.S. government debt.

Of course, that is not how the FOMC is positioning this major escalation in quantitative easing by the Federal Reserve. In the dry, obtuse language that the obscurantists of the Federal Reserve love to engage in, the committee’s official statement said:

“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.”

In  its first bout of heavy quantitative easing, in the wake of the implosion of the major Wall Street investment  banks in the fall of 2008, Ben Bernanke, utilizing his printing press, purchased $1.25 trillion in mortgage-backed securities, and an additional $200 billion in debts owed by so-called government-sponsored enterprises, primarily Freddie Mac and Fannie Mae. This massive explosion in the Fed’s balance sheet has thus far failed to stimulate economic activity and retard a persistent deflationary recession. All that Bernanke has accomplished has been to create a new asset bubble, this time on Wall Street, with equities exploding in price far beyond their post-crisis lows. Beyond the Dow Jones index, however, the impact of Bernanke’s balance sheet expansion has been impotent in the face of economic realities, particularly a collapsing labor market and the contraction in consumer demand. The erosion in the M3 money supply, a statistic the Federal Reserve no longer publicly discloses, attests to the failure of its policies.

Now that the Federal Reserve admits, though in its typically obscure linguistic constructs, that a double-dip recession is becoming increasingly likely, Bernanke is going to enter a buying binge of long-term U.S. Treasuries. The hope is that this will stabilize financial markets, and somehow force liquidity into the economy. That, at least is the hope. Given Ben Bernanke’s track record, I would not bank on hope in the infallible judgement of the Federal Reserve and its FOMC.

What is likely to result from the QE2 phase of the Federal Reserve’s disastrous policymaking? In time, sovereign wealth funds will recognize Bernanke’s manoeuvre for what it is: monetization of the U.S. national debt. When that happens, Treasury auctions will begin to fail, and yields will advance. This will all put added pressure on the Fed to print even more dollars, and monetize an increasing proportion of the federal government’s debt. This will unquestionably inject liquidity into the U.S. economy. But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early1920s, or Zimbabwe more recently.

In deciding on a process that will lead to an ever-growing proportion of the U.S. national debt and yearly budget deficits being monetized by its printing press, the Federal Reserve, under the leadership of its chairman, Ben Bernanke, has taken a fateful step towards irredeemable economic and financial ruin, ultimately convulsing America with a savage, hyperinflationary depression. And, as history teaches us, severe economic depressions bring along other unanticipated consequences, often leading to political and social turmoil and even global war.

Within the past  few days, two of the four most important economic advisors and policymakers within the Obama administration have resigned. They are Peter R. Orszag, budget director at the U.S. Office of Management and Budget, otherwise known as OMB, and Christina Romer, who chairs the Council of Economic Advisers. Remaining on the economics team is Treasury Secretary Timothy Geithner and Larry Summers, Director of the White House National Economic Council. Supposedly, Romer and Orszag are leaving of their own accord, to pursue “other opportunities.” Some speculate that policy differences with Larry Summers and even President Barack Obama were a factor. My own sense is that the worsening economic crisis in the U.S. as well as the overall global economic crisis were leading factors in their resignations, amid the increasing evidence that massive increases in public debt by Washington has not only failed to end the recession and restore robust economic growth; the risk of a sovereign debt crisis in the United States is now a reality.

The resignations of Romer and Orszag are the first ramifications of a failed economic policy. The more tangible result will be the upcoming midterm congressional elections in the U.S., which will almost certainly witness the Democrats losing control of the House of Representatives. From there, things will get worse, as America enters a double-dip recession, while Congress is mired in gridlock and imposes paralysis on the remaining two years of Obama’s presidential term.

As the economic clouds darken in America, it is likely that the resignations of Orszag and Romer are the crest of a wave.

According to the latest data from the U.S. Labor Department, initial unemployment benefit claims reached 479,000 in the last week of July. This reflects an unanticipated increase of 4.1 %, the highest level of initial jobless claims since last April.

The latest jobless claims report from the world’s largest economy make clear that the global economic crisis not only remains a potent reality; the jobs crisis now afflicting most advanced economies make a consumer-led economic recovery impossible. With governments across the globe beginning to transition from deficit-funded stimulus programs to austerity, it is equally clear that sovereigns overloaded with public debt will not be able to compensate for the fall-off in private sector demand much longer.

The latest data on U.S. jobless claims is just another indicator that a double-dip recession is becoming inevitable.

The FDIC once again did its Friday Night below-the-radar exercise; shutting down insolvent banks while Americans and their news media were in low gear or distracted. This time, five more banks were shuttered, while the U.S. media overdosed on coverage of the wedding of the daughter of former president Bill Clinton.

With the FDIC closing of 5 banks in Oregon, Washington,  Florida and Georgia, the total for the first 7 months of 2010 stands at 108 failed institutions. This compares with a mere 69 at the same point last year. And 2009 was supposedly one of the worst years ever for bank closings in the United States since the Great Depression of the 1930s.

Despite claims by U.S. economic policymakers that the American banking crisis was “cured” by the U.S. Treasury and Federal Reserve bailouts of the nation’s financial industry, there is no doubt that FDIC bank closings will set a record in 2010, eclipsing the already dismal figures for 2009.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,”  I project a severe deterioration in the U.S. banking sector during the latter part of 2011. The accelerating pace of FDIC bank closings, combined with the  continuing global economic crisis and  indications of a double dip recession, would seem to provide growing validation of my prediction.